Flash Loan Price Manipulation

Flash loan price manipulation involves borrowing a massive amount of capital in a single transaction to temporarily distort the price of an asset on a decentralized exchange. Because the loan must be repaid within the same block, the attacker uses the temporary price distortion to trigger actions in other protocols, such as liquidating under-collateralized positions or purchasing undervalued assets.

Once the exploit is complete, the attacker sells the assets at the manipulated price and repays the loan, pocketing the difference. This technique exploits the fact that many automated market makers rely on spot prices within their own liquidity pools rather than global market prices.

It is a highly effective way to extract value from protocols that do not account for instantaneous price volatility. The success of this exploit depends on the protocol having insufficient safeguards against rapid, large-scale price changes.

This behavior demonstrates the inherent risk of using on-chain liquidity as a sole source of truth for derivative pricing.